VAT deduction and non-economic activities - KPMG United Kingdom
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VAT deduction and non-economic activities: art or science?

VAT deduction and non-economic activities

Even fully taxable businesses may need to consider potential non-economic business activities and their VAT consequences.


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Not only exempt supplies lead to a VAT cost. Non-economic activities can too. Once thought the preserve of charities and ‘non-business’ entities, a succession of recent cases has confirmed that even fully taxable, wholly for-profit businesses can find themselves engaged in non-economic activity with a consequent VAT hit. It is not always clear when it is possible to look through such activity and preserve VAT recovery. It seems clear that an ‘objective’ approach is required, but the outcome can be challenging to predict. Case law suggests that the size, importance and regularity of the non-economic activity and its underlying purpose all seem important, together of course with the amount of related VAT that HMRC might argue it ‘consumes’.

In a recent article for Tax Journal (first published in Tax Journal on 16 June 2017. Reproduced with permission), Karen Killington and Peter Dylewski take a look at HMRC’s developing approach towards the question of non-economic activity and the non-recovery of associated input tax, and consider what businesses can do to consider potential non-economic business activities they may be carrying on and how to address any associated VAT risk.

For further information please contact:

Karen Killington 

Peter Dylewski

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